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Investments | 9 Months Ended
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Sep. 30, 2019
Investments, Debt and Equity Securities [Abstract] |
Investments | Investments Available for sale fixed maturities at September 30, 2019 and December 31, 2018, consisted of the following (in millions):
| September 30, 2019 |  | December 31, 2018
Amortized Cost |  | Gross Unrealized |  | Net Unrealized |  | Fair Value |  | Amortized Cost |  | Gross Unrealized |  | Net Unrealized |  | Fair Value
Gains |  | Losses |  | Gains |  | Losses
Fixed maturities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Government and government agencies | $ | 225 |  |  | $ | 5 |  |  | $ | (1 | ) |  | $ | 4 |  |  | $ | 229 |  |  | $ | 235 |  |  | $ | 1 |  |  | $ | (3 | ) |  | $ | (2 | ) |  | $ | 233 |
States, municipalities and political subdivisions | 6,519 |  |  | 446 |  |  | (1 | ) |  | 445 |  |  | 6,964 |  |  | 6,825 |  |  | 169 |  |  | (55 | ) |  | 114 |  |  | 6,939 |
Foreign government | 160 |  |  | 4 |  |  | — |  |  | 4 |  |  | 164 |  |  | 140 |  |  | 2 |  |  | — |  |  | 2 |  |  | 142 |
Residential MBS | 2,274 |  |  | 292 |  |  | (4 | ) |  | 288 |  |  | 2,562 |  |  | 2,476 |  |  | 277 |  |  | (9 | ) |  | 268 |  |  | 2,744 |
Commercial MBS | 928 |  |  | 38 |  |  | — |  |  | 38 |  |  | 966 |  |  | 905 |  |  | 17 |  |  | (2 | ) |  | 15 |  |  | 920 |
Collateralized loan obligations | 4,319 |  |  | 13 |  |  | (18 | ) |  | (5 | ) |  | 4,314 |  |  | 4,350 |  |  | 1 |  |  | (73 | ) |  | (72 | ) |  | 4,278 |
Other asset-backed securities | 5,540 |  |  | 201 |  |  | (10 | ) |  | 191 |  |  | 5,731 |  |  | 5,431 |  |  | 129 |  |  | (27 | ) |  | 102 |  |  | 5,533 |
Corporate and other | 23,369 |  |  | 1,234 |  |  | (30 | ) |  | 1,204 |  |  | 24,573 |  |  | 21,475 |  |  | 167 |  |  | (434 | ) |  | (267 | ) |  | 21,208 |
Total fixed maturities | $ | 43,334 |  |  | $ | 2,233 |  |  | $ | (64 | ) |  | $ | 2,169 |  |  | $ | 45,503 |  |  | $ | 41,837 |  |  | $ | 763 |  |  | $ | (603 | ) |  | $ | 160 |  |  | $ | 41,997 |
The non-credit related portion of other-than-temporary impairment charges is included in other comprehensive income. Cumulative non-credit charges taken for securities still owned at September 30, 2019 and December 31, 2018 were $124 million and $140 million, respectively. Gross unrealized gains on such securities at September 30, 2019 and December 31, 2018 were $114 million and $119 million, respectively. Gross unrealized losses on such securities at September 30, 2019 and December 31, 2018 were $3 million and $4 million, respectively. These amounts represent the non-credit other-than-temporary impairment charges recorded in AOCI adjusted for subsequent changes in fair values and relate primarily to residential MBS. Equity securities, which are reported at fair value with holding gains and losses recognized in net earnings, consisted of the following at September 30, 2019 and December 31, 2018 (in millions):
| September 30, 2019 |  | December 31, 2018
|  |  |  |  | Fair Value over (under) Cost |  |  |  |  |  | Fair Value over (under) Cost
| Actual Cost |  |  |  |  | Actual Cost |  |  |
|  | Fair Value |  |  |  | Fair Value |
Common stocks | $ | 1,166 |  |  | $ | 1,261 |  |  | $ | 95 |  |  | $ | 1,241 |  |  | $ | 1,148 |  |  | $ | (93 | )
Perpetual preferred stocks | 732 |  |  | 743 |  |  | 11 |  |  | 705 |  |  | 666 |  |  | (39 | )
Total equity securities carried at fair value | $ | 1,898 |  |  | $ | 2,004 |  |  | $ | 106 |  |  | $ | 1,946 |  |  | $ | 1,814 |  |  | $ | (132 | )
The following tables show gross unrealized losses (dollars in millions) on available for sale fixed maturities by investment category and length of time that individual securities have been in a continuous unrealized loss position at the following balance sheet dates.
| Less Than Twelve Months |  | Twelve Months or More
Unrealized Loss |  | Fair Value |  | Fair Value as % of Cost |  | Unrealized Loss |  | Fair Value |  | Fair Value as % of Cost
September 30, 2019 |  |  |  |  |  |  |  |  |  |  |
Fixed maturities: |  |  |  |  |  |  |  |  |  |  |
U.S. Government and government agencies | $ | — |  |  | $ | — |  |  | — | % |  | $ | (1 | ) |  | $ | 49 |  |  | 98 | %
States, municipalities and political subdivisions | — |  |  | 54 |  |  | 100 | % |  | (1 | ) |  | 74 |  |  | 99 | %
Foreign government | — |  |  | 47 |  |  | 100 | % |  | — |  |  | — |  |  | — | %
Residential MBS | (3 | ) |  | 144 |  |  | 98 | % |  | (1 | ) |  | 69 |  |  | 99 | %
Commercial MBS | — |  |  | 13 |  |  | 100 | % |  | — |  |  | — |  |  | — | %
Collateralized loan obligations | (6 | ) |  | 1,063 |  |  | 99 | % |  | (12 | ) |  | 1,255 |  |  | 99 | %
Other asset-backed securities | (4 | ) |  | 518 |  |  | 99 | % |  | (6 | ) |  | 83 |  |  | 93 | %
Corporate and other | (16 | ) |  | 1,118 |  |  | 99 | % |  | (14 | ) |  | 370 |  |  | 96 | %
Total fixed maturities | $ | (29 | ) |  | $ | 2,957 |  |  | 99 | % |  | $ | (35 | ) |  | $ | 1,900 |  |  | 98 | %
December 31, 2018 |  |  |  |  |  |  |  |  |  |  |
Fixed maturities: |  |  |  |  |  |  |  |  |  |  |
U.S. Government and government agencies | $ | — |  |  | $ | 41 |  |  | 100 | % |  | $ | (3 | ) |  | $ | 120 |  |  | 98 | %
States, municipalities and political subdivisions | (23 | ) |  | 1,497 |  |  | 98 | % |  | (32 | ) |  | 902 |  |  | 97 | %
Foreign government | — |  |  | 18 |  |  | 100 | % |  | — |  |  | 4 |  |  | 100 | %
Residential MBS | (4 | ) |  | 279 |  |  | 99 | % |  | (5 | ) |  | 139 |  |  | 97 | %
Commercial MBS | (1 | ) |  | 147 |  |  | 99 | % |  | (1 | ) |  | 30 |  |  | 97 | %
Collateralized loan obligations | (61 | ) |  | 3,540 |  |  | 98 | % |  | (12 | ) |  | 197 |  |  | 94 | %
Asset-backed securities | (16 | ) |  | 1,866 |  |  | 99 | % |  | (11 | ) |  | 432 |  |  | 98 | %
Corporate and other | (306 | ) |  | 10,378 |  |  | 97 | % |  | (128 | ) |  | 2,078 |  |  | 94 | %
Total fixed maturities | $ | (411 | ) |  | $ | 17,766 |  |  | 98 | % |  | $ | (192 | ) |  | $ | 3,902 |  |  | 95 | %
At September 30, 2019, the gross unrealized losses on fixed maturities of $64 million relate to 602 securities. Investment grade securities (as determined by nationally recognized rating agencies) represented approximately 63% of the gross unrealized loss and 88% of the fair value. AFG analyzes its MBS securities for other-than-temporary impairment each quarter based upon expected future cash flows. Management estimates expected future cash flows based upon its knowledge of the MBS market, cash flow projections (which reflect loan to collateral values, subordination, vintage and geographic concentration) received from independent sources, implied cash flows inherent in security ratings and analysis of historical payment data. In the first nine months of 2019 and 2018, AFG recorded less than $1 million and $1 million, respectively, in other-than-temporary impairment charges related to its residential MBS. In the first nine months of 2019, AFG recorded $15 million in other-than-temporary impairment charges on third-party collateralized loan obligations. In the first nine months of 2019 and 2018, AFG recorded $4 million and $2 million, respectively, in other-than-temporary impairment charges related to corporate bonds. Management believes AFG will recover its cost basis in the securities with unrealized losses and that AFG has the ability to hold the securities until they recover in value and had no intent to sell them at September 30, 2019. A progression of the credit portion of other-than-temporary impairments on fixed maturity securities for which the non-credit portion of an impairment has been recognized in other comprehensive income is shown below (in millions):
| 2019 |  | 2018
Balance at June 30 | $ | 140 |  |  | $ | 144 |
Additional credit impairments on: |  |  |
Previously impaired securities | — |  |  | — |
Securities without prior impairments | — |  |  | — |
Reductions due to sales or redemptions | (3 | ) |  | (1 | )
Balance at September 30 | $ | 137 |  |  | $ | 143 |
Balance at January 1 | $ | 142 |  |  | $ | 145 |
Additional credit impairments on: |  |  |
Previously impaired securities | — |  |  | — |
Securities without prior impairments | — |  |  | 1 |
Reductions due to sales or redemptions | (5 | ) |  | (3 | )
Balance at September 30 | $ | 137 |  |  | $ | 143 |
The table below sets forth the scheduled maturities of available for sale fixed maturities as of September 30, 2019 (dollars in millions). Securities with sinking funds are reported at average maturity. Actual maturities may differ from contractual maturities because certain securities may be called or prepaid by the issuers.
| Amortized |  | Fair Value
Cost |  | Amount |  | %
Maturity |  |  |  |  |
One year or less | $ | 2,223 |  |  | $ | 2,249 |  |  | 5 | %
After one year through five years | 10,338 |  |  | 10,742 |  |  | 24 | %
After five years through ten years | 13,997 |  |  | 14,927 |  |  | 33 | %
After ten years | 3,715 |  |  | 4,012 |  |  | 8 | %
| 30,273 |  |  | 31,930 |  |  | 70 | %
Collateralized loan obligations and other ABS (average life of approximately 4.5 years) | 9,859 |  |  | 10,045 |  |  | 22 | %
MBS (average life of approximately 4.5 years) | 3,202 |  |  | 3,528 |  |  | 8 | %
Total | $ | 43,334 |  |  | $ | 45,503 |  |  | 100 | %
Certain risks are inherent in fixed maturity securities, including loss upon default, price volatility in reaction to changes in interest rates, and general market factors and risks associated with reinvestment of proceeds due to prepayments or redemptions in a period of declining interest rates. There were no investments in individual issuers that exceeded 10% of shareholders’ equity at September 30, 2019 or December 31, 2018. Net Unrealized Gain on Marketable Securities In addition to adjusting fixed maturity securities classified as “available for sale” to fair value, GAAP requires that deferred policy acquisition costs and certain other balance sheet amounts related to annuity, long-term care and life businesses be adjusted to the extent that unrealized gains and losses from securities would result in adjustments to those balances had the unrealized gains or losses actually been realized. The following table shows (in millions) the components of the net unrealized gain on securities that is included in AOCI in AFG’s Balance Sheet.
| Pretax |  | Deferred Tax |  | Net
September 30, 2019 |  |  |  |  |
Net unrealized gain on: |  |  |  |  |
Fixed maturities — annuity segment (*) | $ | 1,777 |  |  | $ | (373 | ) |  | $ | 1,404 |
Fixed maturities — all other | 392 |  |  | (83 | ) |  | 309 |
Total fixed maturities | 2,169 |  |  | (456 | ) |  | 1,713 |
Deferred policy acquisition costs — annuity segment | (760 | ) |  | 160 |  |  | (600 | )
Annuity benefits accumulated | (259 | ) |  | 54 |  |  | (205 | )
Unearned revenue | 15 |  |  | (3 | ) |  | 12 |
Total net unrealized gain on marketable securities | $ | 1,165 |  |  | $ | (245 | ) |  | $ | 920 |
December 31, 2018 |  |  |  |  |
Net unrealized gain on: |  |  |  |  |
Fixed maturities — annuity segment (*) | $ | 101 |  |  | $ | (21 | ) |  | $ | 80 |
Fixed maturities — all other | 59 |  |  | (13 | ) |  | 46 |
Total fixed maturities | 160 |  |  | (34 | ) |  | 126 |
Deferred policy acquisition costs — annuity segment | (42 | ) |  | 9 |  |  | (33 | )
Annuity benefits accumulated | (14 | ) |  | 3 |  |  | (11 | )
Unearned revenue | 1 |  |  | — |  |  | 1 |
Total net unrealized gain on marketable securities | $ | 105 |  |  | $ | (22 | ) |  | $ | 83 |
(*) | Net unrealized gains on fixed maturity investments supporting AFG’s annuity benefits accumulated.
Net Investment Income The following table shows (in millions) investment income earned and investment expenses incurred.
| Three months ended September 30, |  | Nine months ended September 30,
| 2019 |  | 2018 |  | 2019 |  | 2018
Investment income: |  |  |  |  |  |  |
Fixed maturities | $ | 475 |  |  | $ | 440 |  |  | $ | 1,422 |  |  | $ | 1,283 |
Equity securities: |  |  |  |  |  |  |
Dividends | 22 |  |  | 19 |  |  | 66 |  |  | 59 |
Change in fair value (*) | 17 |  |  | 2 |  |  | 35 |  |  | 16 |
Equity in earnings of partnerships and similar investments | 43 |  |  | 41 |  |  | 109 |  |  | 128 |
Other | 36 |  |  | 31 |  |  | 95 |  |  | 82 |
Gross investment income | 593 |  |  | 533 |  |  | 1,727 |  |  | 1,568 |
Investment expenses | (5 | ) |  | (6 | ) |  | (17 | ) |  | (16 | )
Net investment income | $ | 588 |  |  | $ | 527 |  |  | $ | 1,710 |  |  | $ | 1,552 |
(*) | Although the change in the fair value of the majority of AFG’s equity securities is recorded in realized gains (losses) on securities, AFG records holding gains and losses in net investment income on equity securities classified as “trading” under previous guidance and on a small portfolio of limited partnership and similar investments that do not qualify for the equity method of accounting.
Realized gains (losses) and changes in unrealized appreciation (depreciation) included in AOCI related to fixed maturity and equity security investments are summarized as follows (in millions):
| Three months ended September 30, 2019 |  | Three months ended September 30, 2018
| Realized gains (losses) |  |  |  | Realized gains (losses) |  |
| Before Impairments |  | Impairments |  | Total |  | Change in Unrealized |  | Before Impairments |  | Impairments |  | Total |  | Change in Unrealized
Fixed maturities | $ | 9 |  |  | $ | (14 | ) |  | $ | (5 | ) |  | $ | 367 |  |  | $ | — |  |  | $ | (2 | ) |  | $ | (2 | ) |  | $ | (213 | )
Equity securities | (16 | ) |  | — |  |  | (16 | ) |  | — |  |  | 33 |  |  | — |  |  | 33 |  |  | — |
Mortgage loans and other investments | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Other (*) | (2 | ) |  | 5 |  |  | 3 |  |  | (230 | ) |  | 3 |  |  | — |  |  | 3 |  |  | 89 |
Total pretax | (9 | ) |  | (9 | ) |  | (18 | ) |  | 137 |  |  | 36 |  |  | (2 | ) |  | 34 |  |  | (124 | )
Tax effects | 2 |  |  | 2 |  |  | 4 |  |  | (29 | ) |  | (8 | ) |  | 1 |  |  | (7 | ) |  | 26 |
Net of tax | $ | (7 | ) |  | $ | (7 | ) |  | $ | (14 | ) |  | $ | 108 |  |  | $ | 28 |  |  | $ | (1 | ) |  | $ | 27 |  |  | $ | (98 | )
| Nine months ended September 30, 2019 |  | Nine months ended September 30, 2018
| Realized gains (losses) |  |  |  | Realized gains (losses) |  |
| Before Impairments |  | Impairments |  | Total |  | Change in Unrealized |  | Before Impairments |  | Impairments |  | Total |  | Change in Unrealized
Fixed maturities | $ | 23 |  |  | $ | (20 | ) |  | $ | 3 |  |  | $ | 2,009 |  |  | $ | 3 |  |  | $ | (3 | ) |  | $ | — |  |  | $ | (1,150 | )
Equity securities | 210 |  |  | — |  |  | 210 |  |  | — |  |  | (39 | ) |  | — |  |  | (39 | ) |  | — |
Mortgage loans and other investments | 3 |  |  | — |  |  | 3 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Other (*) | (1 | ) |  | 7 |  |  | 6 |  |  | (949 | ) |  | 11 |  |  | — |  |  | 11 |  |  | 484 |
Total pretax | 235 |  |  | (13 | ) |  | 222 |  |  | 1,060 |  |  | (25 | ) |  | (3 | ) |  | (28 | ) |  | (666 | )
Tax effects | (49 | ) |  | 3 |  |  | (46 | ) |  | (223 | ) |  | 5 |  |  | 1 |  |  | 6 |  |  | 140 |
Net of tax | $ | 186 |  |  | $ | (10 | ) |  | $ | 176 |  |  | $ | 837 |  |  | $ | (20 | ) |  | $ | (2 | ) |  | $ | (22 | ) |  | $ | (526 | )
(*) | Primarily adjustments to deferred policy acquisition costs and reserves related to the annuity business.
All equity securities other than those accounted for under the equity method are carried at fair value through net earnings. AFG recorded net holding gains (losses) on equity securities during the first nine months of 2019 and 2018 on securities that were still owned at September 30, 2019 and September 30, 2018 as follows (in millions):
| Three months ended September 30, |  | Nine months ended September 30,
| 2019 |  | 2018 |  | 2019 |  | 2018
Included in realized gains (losses) | $ | (24 | ) |  | $ | 25 |  |  | $ | 146 |  |  | $ | (51 | )
Included in net investment income | 17 |  |  | 2 |  |  | 34 |  |  | 16 |
| $ | (7 | ) |  | $ | 27 |  |  | $ | 180 |  |  | $ | (35 | )
Gross realized gains and losses (excluding impairment write-downs and mark-to-market of derivatives) on available for sale fixed maturity investment transactions consisted of the following (in millions):
| Nine months ended September 30,
2019 |  | 2018
Gross gains | $ | 20 |  |  | $ | 19 |
Gross losses | (12 | ) |  | (8 | )

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- Definition The entire disclosure for investments in certain debt and equity securities. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 942 -SubTopic 320 -URI http://asc.fasb.org/subtopic&trid=2209399 Reference 2: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 946 -SubTopic 320 -URI http://asc.fasb.org/subtopic&trid=2324412 Reference 3: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 320 -URI http://asc.fasb.org/topic&trid=2196928 Reference 4: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 940 -SubTopic 320 -URI http://asc.fasb.org/subtopic&trid=2176304 + Details
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